Quality Cost Part II : Cost of Quality

The cost of quality, or CoQ, includes the cost of poor quality and the cost of good quality. In addition to internal and external failure costs, cost of quality includes prevention and appraisal costs. Prevention and appraisal costs are often referred to as the costs of conformity – they are the expenses related to ensuring outputs conform to critical to quality requirements.

Prevention Costs

The costs of prevention are the expenses that are related to any activity meant to stop an error or defect from occurring. Error-proofing, which is covered in detail in later chapters on controlling processes, results in prevention costs. For example, if a company produces baked goods, at some point in the process people or machines must measure ingredients to add to dough batches.

One way to error-proof such a process is to provide specialized machinery that will only allow a specific amount of each ingredient to be introduced to a batch. Such a machine would likely be quite expensive; it would also have to be managed by a qualified operator and maintained by appropriate repair and cleaning staff. All of that activity would generate costs which might be considered preventative in nature.

Other types of prevention costs include expenses related to quality planning, reviews, or education and training focused on quality. Quality review and evaluation processes also create prevention costs, whether those reviews are related to suppliers, products, processes, or people. Customer surveys, the creation of technical manuals, work to create and manage requirements and specifications, and the management of job descriptions can all lead to prevention costs. Even housekeeping costs might be considered preventative costs, especially if a clean work environment is required to reduce flaws or errors in product manufacturing.

Appraisal Costs

Appraisal costs are those associated with any activity meant to ensure high levels of quality across a process or organization. If a manufacturing plant hires a quality control specialist, and that person’s job is to review parts that come down the manufacturing line and either return the work for correction or report the level of quality as a metric, then the salary of that person and any expenses related to his or her employment are appraisal costs. In some cases, those expenses might also be considered prevention costs, but they would not be counted twice when calculating cost of quality.

Other types of appraisal costs might include expenses related to quality audits on products, services, or processes, the cost of calibration and measurement equipment or software, and the costs of field tests. Prototype inspections, consulting expenses, financial reporting and auditing, security checks, safety checks, supplier certifications, employee surveys, and customer feedback are all further examples of areas where appraisal costs might exist.

Calculating the Cost of Quality

The equation for cost of quality is:

CoQ = CoPQ + Prevention Costs + Appraisal Costs

The same challenges inherent in calculating CoPQ also exist when calculating CoQ. The same iceberg analogy is relevant, and prevention and appraisal activities often have hidden costs such as unnecessary overtime, paperwork, or system expenses.

The Cost of Quality and Six Sigma

Traditional wisdom might say that if the cost of poor quality goes down, the cost of good quality is likely to go up. You have to spend money on quality to have good quality, in other words. While historically that might be true for many organizations, it is not the case in a Six Sigma company. Because Six Sigma works to create quality that is inherent in the process – meaning things are done right the first time and defects are reduced – the costs of quality often go down while quality itself goes up.

In our previous article, we showed that a process with a higher sigma level (and thus, higher quality) has fewer defects. Defects decrease in an exponential manner as sigma level rises. Because there are fewer defects, the costs of poor quality are exponentially reduced as well. But time and again, Six Sigma has also reduced the cost of overall quality. As the sigma level of processes is increased via the application of Six Sigma tools and methodology, the cost of both prevention and appraisal goes down as well.

One way of relating the cost of quality – and perhaps the most common way of doing so among corporations – is as a percent of sales. The cost of quality as a percent of sales typically aligns so closely with sigma values that you can predict the cost of quality based on a company’s or process’s sigma value. The average ranges for CoQ in relation to sigma values are shown in the table below. As you can see, as companies improve their sigma levels, they experience a substantial savings in the cost of quality.